BAPCPA at 10 Business Bankruptcy Trends

• Jurisdiction: United States

BAPCPA at 10: Business Bankruptcy Trends

Recently, the American Bankruptcy Institute (ABI) marked the tenth anniversary of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) by hosting a panel to assess the effects of BAPCPA on financially distressed businesses. The panel included Robert J. Keach, a shareholder at Bernstein Shur Sawyer & Nelson in Portland, Maine, and co-chair of ABI's Commission to Study the Reform of Chapter 11, as well as Richard B. Levin, a member of Jenner & Block LLP's Bankruptcy Workout and Corporate Reorganization Practice in New York, who was counsel to a subcommittee of the House Judiciary Committee from 1975-78 and one of the primary authors of the Bankruptcy Reform Act of 1978, commonly known as the Bankruptcy Code. Moderating the program was Prof. Michelle M. Harner, a professor of law and the director of the Business Law Program at the University of Maryland Francis King Carey School of Law in Baltimore. Prof. Harner was ABI's Robert M. Zinman ABI Resident Scholar for the fall 2015 semester and the Reporter for the ABI Commission to Study the Reform of Chapter 11. The program consisted of a 40-minute presentation by the panelists, offered here in the form of an edited conversation.

Michelle Harner:Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act, commonly referred to as BAPCPA, in April of 2005. The provisions of BAPCPA went into effect on October 17, 2005. BAPCPA represents perhaps the most significant package of amendments to the 1978 Bankruptcy Code. Although BAPCPA is largely thought to have changed the consumer bankruptcy landscape, it also made numerous substantive changes to business bankruptcies. The purpose of today's call is to explore the changes made by and the impact of BAPCPA on business bankruptcy cases during the past 10 years.

With that, let's jump into the panel discussion. I always think it's prudent to start at the beginning, so I'd like to ask our panelists to briefly summarize what motivated the business provisions of BAPCPA.

Rich Levin:Going back, BAPCPA actually started its way through Congress in 1997. It was drafted largely as a response to the consumer provisions of the report of the National Commission on Bankruptcy Law that was created under the 1994 bankruptcy legislation. That commission submitted its report to Congress around 1997, and the consumer finance industry had a lot of problems with its proposals, so it developed its own counter-proposal that ultimately was enacted eight years later as BAPCPA. During that eight-year journey through Congress, as is so often the case, other interested parties in bankruptcy cases saw a vehicle on which they could add things that addressed certain, particular problems that they had experienced in bankruptcy cases.

Whether it was a letter from a constituent to a member complaining about a particular problem that had arisen in a business bankruptcy case, or whether it was an industry group coming to Congress, a whole spate of business bankruptcy provisions were added to the legislation over its eight-year journey. One of the interesting aspects of congressional consideration of bankruptcy legislation that makes it very different from most other legislation is that one of the principal parties in a bankruptcy case, the business side, does not have any representation on Capitol Hill. On the consumer side, it's different.

On the business side, the groups that have representation tend to be the creditor groups. There are a dozen or two dozen different types of creditor groups, maybe more. They contend with each other to support their interest in recoveries from bankruptcy cases, but nobody is out there really looking out for the debtor company that's trying to reorganize or for the process as a whole. There's no representative group that is lobbying for a balance among all of the creditor groups that are competing for different pieces of the legislation that will favor their position in bankruptcy cases. As a result, what drove the business provisions was a variety of creditor groups seeking better treatment in bankruptcy than they had been receiving under the '78 Code and seeking to improve their position, and many of them got that.

Now, that sometimes comes out of the pockets of other creditors. It sometimes impairs the ability of a company to reorganize and survive and preserve jobs and its place in the community and investment, and sometimes it doesn't. It does tend to be a one-sided push in Congress, just by the way the economics are set up. I'm not suggesting anything nefarious here. It's just the way the economics are set up, and that's, I think, what led to the business provisions or what motivated the business provisions of BAPCPA.

Michelle:I appreciate that explanation and the insight as to how the legislative changes on the business side at least came about, because I think that will be very relevant when we discuss the impact on the ground of these changes, 10 years later, a little bit later in this session. Before we get there, Bob, given that background, I was

Source: "Leases, Executory Contracts and the Impact of Revised § 365(d)(4)," March 2015 ABI Journal

I think those are pretty typical examples, but again, thematically, I think of one category, which is, make chapter II faster, make the time frames more certain, and give creditors more certainty about outcomes. Consistent with that, I would say that a second bucket would be that there was a general reduction in judicial discretion — namely, fewer opportunities for judges to extend time or to create leniency or opportunities for debtors, and therefore at times to balance the leverage in the case. Then the third category would be the exclusion of certain transactions or even whole creditor classes from the reach of the Bankruptcy Code at all.

In some cases, the BAPCPA provisions were simply continuations or enhancements of that effort. An example would be the BAPCPA amendments to various of the so-called safe-harbor provisions, which either enhanced or clarified the ability of parties like swap counterparties, or a party to repurchase agreements, or to so-called forward contracts, to exclude those transactions largely from the reach of the Code so as to not be inhibited by the automatic stay with respect to those transactions, but to not be subject to preference risk and the like. Some of those provisions are in BAPCPA; some of those provisions were in companion legislation that occurred roughly at the same time.

For example, BAPCPA added, I believe, 11 or 12 new exclusions to the automatic stay. Again, thematically I would say shorter, more fixed time frames, reduction of judicial discretion, and an attempt to take whole categories of transactions or creditors outside the reach of the Bankruptcy Code — largely creditor favorable, larger the swing of the pendulum back in that direction.

Rich:Let me relate what Bob just said back to my opening remarks on this, and that is that creditors at the time believed that cases were taking too long, and so they were seeking shorter time periods and harder time periods, and they believed the judges were too accommodating to reorganizing companies, and so they sought to remove judicial discretion generally and then specifically with respect to the time period. Even those first two categories of changes were primarily driven by various creditor groups.

Michelle:Before we drill down on the specific changes that were made by BAPCPA, let me push back on those general themes to both of you for one minute, because I do want to make sure that we think about all the perspectives. Rich, you noted the creditor motivation behind some of these changes to the extent that there were themes running through the BAPCPA changes that made cases shorter, that gave at least certain creditor groups more certainty about their recoveries. You could, at least in theory, say that that would have a positive impact on the pricing of credit and the availability of credit to distressed companies. Is that a potential advantage there? If it is, is it outweighed by the disadvantages you've been identifying to the overall process made by BAPCPA changes?

[Source: Final Report of ABI's Commission to Study the Reform of Chapter 11, p. 221]

Rich:It's a good question, and the lending groups have argued that it does support lower credit pricing. However, that's only half the picture. If we assume that most companies, almost all companies in bankruptcy are insolvent, that means shareholders are going to recover nothing. The question is how the value of the company gets divided up among the creditors. If one creditor group is given an advantage, it means it's taking it away from other creditor groups. It might be lowering the price of credit for some groups, but it might be increasing the price of credit for other groups and reducing the recoveries of other groups.

This is somewhat of a zero-sum game. If you take it away from one, you're giving it to another, or if you're giving it to one, you're taking it way from another. It's hard to say, overall, whether it's affected the price of credit, even though it might be that it has lowered the price of credit in certain sectors.

Bob:I think what happened in statutory changes to bankruptcy has very little effect on the greater credit markets. Bankruptcy, as important as it is to us [as practitioners], is actually a very tiny percentage of the overall credit market. It's difficult, frankly, for Bankruptcy Code changes to have big credit impact, and I don't think BAPCPA did. I do think that the specific BAPCPA changes — we'll talk, for example, about what happened with the time to assume or reject commercial leases — actually had unintended consequences and restricted the availability of debtor-in-possession financing to debtors, because the times were shorter and lenders wanted to preserve some portion of that time for liquidation activity should they...